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Landlording could beat low CD rates

By Claes Bell ·
Monday, September 19, 2011
Posted: 2 pm ET

A few months ago, in an effort to help CD investors plagued by ridiculously low CD rates, my colleague Sheyna Steiner blogged about three alternatives: I bonds, high-yield checking accounts and dividend paying stocks.

I'll add one more: buying an investment property and becoming a landlord. I spent some time surfing around Zillow the other day, and I was struck by the huge difference between home value estimates and rent value estimates in the part of South Florida I call home. One home, valued at $80,200, had an estimated rent of $1,328 per month!

Now it's possible Zillow is fielding some really inaccurate estimates here, but let's assume they're correct. The distance between what it costs to own and what it costs to rent in some areas does make some sense. After all, the millions of former homeowners who've been foreclosed on in the last few years are now effectively locked out of buying a new home for about a decade. However, they have to live somewhere, which is causing rents to rise even as housing prices are stagnating in most areas and falling in many.

That's why, unlike nearly every housing industry indicator besides foreclosures, the rental price component of the Bureau of Labor Statistics' Consumer Price Index has actually risen since the housing bust started. Since Sept. of 2008, rents have gone up 4.37 percent, even as housing prices have fallen dramatically.

You see where I'm going here. It's now possible to buy rentable homes in many markets for less than the cost of a jumbo CD and realize a much bigger return. Take the aforementioned home. Over the course of 5 years, $1,328 per month works out to $79,680. To keep it realistic, let's subtract $400 a month ($24,000) for property taxes and insurance and $200 a month for maintenance ($12,000), and you're down to $33,680 in returns.

Now let's say the slide in Florida home values continues, and your hypothetical rental house loses 20 percent of its value, on top of the around 50 percent of value it's already shed since the peak of the housing market. Subtract that depreciation ($16,040) from your $33,680 in rental earnings, and you're at $17,640 in total returns, which works out to an annual return of around 4 percent.

Now let's say instead you invested $80,200 in a 5-year CD. According to Bankrate's CD calculator, at the current average yield of 1.38 percent, you'll end up with a total return of $5,682.87 by the time the CD matures. By any standard, that's pretty lackluster, and for some people getting by on investment income, downright impoverishing.

To be clear, I'm not saying everyone should dump CDs and go buy distressed properties. Being a landlord can be risky, difficult and stressful, especially compared to the duties of CD investors, which are pretty much restricted to cashing yield checks.

But what I am saying is that if current CD rates are so low they're causing you financial distress, becoming a landlord may be an option worth exploring.

What do you think? Is landlording a viable alternative for monthly investment income, or is it too risky?

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